FX.co ★ EUR/USD weekly preview: Powell, China's GDP, and the Middle East

Last week, the US released its key inflation report, which painted a somewhat contradictory picture. On one side of the scale, we had the Producer Price Index and the Consumer Price Index, which entered the "green zone." On the other side, we had the Core CPI, which hit its lowest point since September 2021. This also includes the core PCE price index, which was published at the end of September and has consistently shown a decline.

In other words, we're facing a situation where Federal Reserve officials must answer a simple yet complex question: Is the glass half full or half empty? Will the central bank maintain its patient stance in the upcoming meetings, or has the need for an additional round of interest rate hikes increased? These questions remain unanswered for now. Therefore, the upcoming week will be important to traders of dollar pairs. Over the course of five days, Fed Chair Jerome Powell as well as 12 other US central bank officials will share their opinions. It's safe to say that by the end of this week, the central bank's position regarding the future of monetary policy tightening will be established.

Let's take a look at the upcoming events for the EUR/USD pair. This week promises to be quite eventful. Over the next five days, we will hear from 12 members of the Federal Reserve (Fed) and also get insights from the Fed Chair, Jerome Powell.

Here's the schedule of Fed speakers for the upcoming week:

• On Monday, October 16th, the President of the Federal Reserve Bank of Philadelphia, Patrick Harker, who holds voting rights this year, will be speaking.
• On Tuesday, members of the Federal Reserve Board, Michelle Bowman (voting member by position), John Williams, the President of the Federal Reserve Bank of New York (voting member), and Thomas Barkin, the President of the Federal Reserve Bank of Richmond (non-voting member), will be delivering speeches.
• Wednesday will feature Christopher Waller, a member of the Federal Reserve Board (voting member), and again, speeches from Patrick Harker and Michelle Bowman.
• Thursday is the day to watch out for, as it includes a speech by Jerome Powell, the Chair of the Federal Reserve (naturally, a voting member), along with Philip Jefferson, the Vice President of the Federal Reserve, Michael Barr (voting member), the President of the Federal Reserve Bank of Chicago, Esther George (voting member), and Raphael Bostic, the President of the Federal Reserve Bank of Atlanta (non-voting member).
• On Friday, the President of the Federal Reserve Bank of Dallas, Robert Kaplan (voting member), and the President of the Federal Reserve Bank of Cleveland, Loretta Mester (non-voting member this year), will deliver speeches.

As you can see, the majority of the Fed officials who are scheduled to speak have voting rights in the Federal Open Market Committee (FOMC), either by position or through rotation. Their stance is crucial because they directly influence the Fed's policy decisions. Take note of Powell's speech at the Economic Club of New York as he might assess or comment on recent inflation reports in the context of future monetary tightening.

It's worth mentioning that, according to the CME FedWatch Tool, there is only a 6% chance of a rate hike in November, while the chances of a December rate hike are estimated at 30%. If Fed officials express concern about the rise in the PPI and CPI, they could potentially strengthen the hawkish sentiment, at least in the context of December expectations.

In addition, Chinese economic reports could have an indirect impact on the EUR/USD pair. Key growth indicators for China's economy for the third quarter will be published on Wednesday, October 18th. On a year-on-year basis, GDP expanded 6.3% in the second quarter, while the consensus estimate was for an increase of 7.3%. Despite the actual figure being in the "red zone," it was still impressive. However, a significant portion of this was due to the low base effect, as several Chinese metropolises, including Shanghai, had strict quarantine restrictions in the second quarter of 2022, negatively affecting China's economy.

According to forecasts, most analysts predicted the economy would grow by 4.5% in the third quarter. However, if the figure turns out to be in the "red zone," it may lead to a resurgence of risk-off sentiment. In this case, the dollar will benefit from this situation, and the demand for it will increase.

Interest in safe-haven assets could also rise due to another fundamental factor. As is known, the situation in the Middle East continues to grow tense. According to The New York Times, the Israeli army postponed its planned ground operation in the Gaza Strip for this weekend "due to cloudy weather that could interfere with the support provided by drones." However, according to another American publication, The New York Post, Israeli military forces are preparing for an imminent invasion of the Gaza Strip, which is expected to happen "any day now." According to most observers, this move would be a turning point, with unpredictable consequences due to the high risk of involving third parties in the conflict. It's clear that at the moment, the situation is developing towards escalation. However, today's press also carries other, more positive information. According to the Financial Times, the Hamas movement has expressed its readiness to release civilian prisoners if the Israel Defense Forces (IDF) stop their attacks on the Gaza Strip. According to unnamed sources, this requirement is supposedly part of an agreement being prepared by Qatar and the United States.

The "Middle East factor" could significantly impact the dynamics of EUR/USD if further events continue to unfold in an escalation scenario (unfortunately, the most likely outcome).

So, we have quite a "hot" trading week ahead of us. The main focus will be on the Fed officials (especially Powell). If Fed members adopt a more hawkish stance in response to the recent inflation reports, the EUR/USD pair may retest the support level at 1.0450 (the lower Bollinger Bands line on the daily chart). However, if they maintain a cautious position, the pair is likely to return to the range of 1.0650-1.0750 (provided that China and the Middle East don't trigger a surge in risk-off sentiment).